Angst for Everyone in Markets as Chips Bleed With Bonds, Dollar

  • Equities, Treasuries in one of 2017’s biggest tandem selling
  • Philadelphia Semiconductor Index falls most since December

The shroud of tranquility that has blanketed asset markets for the last eight months has been pulled back a bit.

Volatility is suddenly proving hard to get rid of in places like semiconductors, whose commercial ubiquity makes them a proxy in some eyes for economic growth. Treasury yields are rising at the same time the dollar’s falling, hinting at anxiety about central bank policy. This year’s hottest risk-on trade, the so-called Fang block of U.S. megacaps, has started taking lumps.

It’s not that a bout of turbulence wasn’t due: volatility in benchmark stock indexes has spent the year hovering at roughly half its average level since 1991. But aspects of the market’s action in the last few days suggest investors are a little more bothered than they had been about the economy’s ability to withstand a central bank tightening cycle.

Draghi opened up Pandora’s box two days ago and Yellen did not close it,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets. “Both Yellen and Fischer talked about the high level of asset prices a la equities. Perfect storm all at once. Coordinated? No, but inevitable.”

Going by the performance of exchange-traded funds, stocks and bonds suffered one of their biggest concerted selloffs of the year Thursday. The SPDR S&P 500 ETF Trust slipped 0.9 percent while the iShares 20+ Year Treasury Bond ETF fell 0.8 percent, reprising a lockstep decline from Tuesday that before then hadn’t happened since December.

At its highest point Thursday, the CBOE Volatility Index was up 51 percent before paring the increase 14 percent. The dollar fell for a seventh day versus the pound and to the lowest in 13 months against the euro, while yields on 10-year Treasuries climbed to the highest in a month.

Nerves are a little less calm in a week when central banks from Europe to the U.S. gave conflicting signals on plans for monetary tightening. While officials later walked back hawkish comments from ECB President Mario Draghi, Fed Chair Janet Yellen gave no indication that her plans had shifted while acknowledging that some asset prices had become “somewhat rich,” comments echoed by two other officials.

While the withdrawal of stimulus itself may be a sign that central banks see the threat of disinflation easing, investors have also been treated to a serving of disappointing data in the U.S., including Monday’s miss in durable goods orders and last month’s report on employment. In fact, economic data is trailing economists’ expectations by the most in six years, according to a Citigroup Inc. index tracking actual releases relative to forecasts.

“The comments from central banks got the markets worried, then there is a concern about valuations, then you have investors pulling money out of some of the best-performing growth stocks,” Walter Todd, chief investment officer for Greenwood Capital Associates LLC in South Carolina, said by phone. “There is a lot of market uncertainty throughout the asset classes, and it will likely continue until we reach the earnings season.”

Chipmakers approached the correction territory, with the Philadelphia Semiconductor Index falling as much as 9.9 percent from a record high on June 8. The index hasn’t lost more than 10 percent since early 2016 and is down 4.3 percent this week, heading for the worst return this year.

The Nasdaq 100 Index dropped 1.7 percent Thursday, closing below its 50-day moving average for the second time in seven months. Volatility has come crashing back to the tech gauge, whose average swing has been 0.57 percent over the last 50 days, the widest relative to the S&P 500 since 2014.

“Higher U.S. rates and rapid sector rotation following the bank stress tests are bleeding U.S. tech stock prices,” Jim Vogel, a strategist at FTN Financial Capital Markets, said in a note to clients Thursday. “Tech was the last bastion for quarterly risk-asset profits, and the selling got out of hand today for the go-go names.” 

As always, the market’s signals are far from unanimous. Weakness in one industry has repeatedly been offset by strength in another. Drug stocks rallied last week. Banks have risen the last four days. Breadth in the Nasdaq Composite Index was weighted toward losers Thursday, but not overwhelmingly so. The S&P 500’s first-half gain of 8.1 percent remains bigger than any year since 2013.

One bullish interpretation of the turbulence is that the market is validating the Fed’s view that the economic slowdown is temporary. Investors had embraced tech companies, drawn to an industry whose profit growth is forecast to almost double the market’s. As they retreated from high flyers such as Apple Inc. and Inc., money has flowed to financial and energy shares, companies seen cheap and rewarding when the economic outlook brightens.

“It’s a totally different message or backdrop – you had a very friendly Fed for a couple of years. Now you have a Fed that’s basically neutral if not hostile,” Bruce Bittles, chief investment strategist at Robert W Baird, said by phone. “The economy may be stronger than the numbers suggest. If that’s true, then value stocks would come back in favor over growth. Maybe that’s what’s happening.”

— With assistance by Oliver Renick, and Elena Popina

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